A long term view of Australian equities

And to place the previous post in context, every six months or so, we step back to have a really long term look at the Australian equities market.

From the market low in 1884, the market added around 5% per annum - the blue line above illustrates what straight line growth of 5.2% per annum would have looked like. (For clarity, this does not include dividends.)

A couple observations from this chart:

1) The relative step up in the market from the mid-70′s onwards neatly coincides with increasing leverage in the Australian economy. With the baby boomers reaching asset liquidation age, it's reasonable to suppose that we are approaching the more difficult part of the market valuation cycle.

2) It takes a long time to work off excesses (see an earlier article here), whether by inflation, saving or innovation - something like 13 - 15 years seems about the norm. On the assumption that we are in a bear market cycle, that started in 2007, we might expect the market then to regain its recent peak around 2020. Still, one could argue that this is view of the world is redundant if we have simply become a vassal of China.

Zooming in a little to look at how the market performed over a number of cycles, the following chart starts from the market peak in 1970. (Note that the blue trend line in the chart is the exact same one that we saw in the earlier chart - that 5.2% per annum growth since 1884.):

On the assumption that this ~5% growth in the market is the mean that we keep reverting to, then this chart seems to confirm that fair value might see the market back at its 2007 peak around 2020.

Perhaps its not so remarkable that the Australian market appears to have a speed limiter set at around 5% per annum. That roughly equates to our long term growth in GDP amplified by corporate leverage on earnings.

And as if to further reinforce the point, the following chart maps the growth rate peak to peak and then low to low between 1987 and 2007. Once again it seems that the an annual growth rate of around 5% seems about right for the Australian market. The yellow trend line in the middle takes the mid-point of the 1987 high to low and extrapolates growth forward at our magic 5.2%.

Think these trend lines pretty neatly capture reasonable expectations for the range for the market that we can expect for the next few years. With peak debt likely behind us, think we can expect the squiggles to be contained between 3000 and 5500 for a year or five yet.